Small Community Service Prospects Faye Malarkey Regional Airline Association Federal Aviation Administration 30th Annual Aviation Forecast Conference March 18, 2005

Regional Airline Facts Estimated 129 million passengers transported in 2004 Estimated 129 million passengers transported in 2004 More than 15,000 flights a day More than 15,000 flights a day 1 in 4 domestic passengers travel on regional airlines 1 in 4 domestic passengers travel on regional airlines Regional airlines operate approximately 2,700 aircraft, approximately 1/3 of the U.S. commercial airline fleet Regional airlines operate approximately 2,700 aircraft, approximately 1/3 of the U.S. commercial airline fleet

Regional Airline Service Serve 735 airports in Serve 735 airports in North America North America (95% of total) Serve 655 airports in Serve 655 airports in United States (98% of total) United States (98% of total) Regional airlines provide the Regional airlines provide the only air service at 72 percent only air service at 72 percent of these airports of these airports

Regional Airline Passengers 11 million in million in 2004

Code Sharing the lifeblood of the regional industry 54 code-sharing agreements 54 code-sharing agreements 10 owned by majors/nationals 2 partially owned by majors 42 marketing agreements (as of January 2005) Code-sharing airlines transport 99% of passengers

Code-Sharing Under “fee for departure” agreements, major airlines determine where regional airlines fly Under “fee for departure” agreements, major airlines determine where regional airlines fly Major pays regional flat rate per flight Major pays regional flat rate per flight Service must fit within the network Service must fit within the network Service must match revenue objectives of major, including opportunity cost of flying to one market vs. another Service must match revenue objectives of major, including opportunity cost of flying to one market vs. another Under “pro-rate” contracts, regional and major airlines partner on routes and service Under “pro-rate” contracts, regional and major airlines partner on routes and service Regional paid portion of revenue from fare, assumes portion of financial risk Regional paid portion of revenue from fare, assumes portion of financial risk New fare environment making this service harder to provide. Communities may need to provide revenue guarantees for new regional service New fare environment making this service harder to provide. Communities may need to provide revenue guarantees for new regional service

Regional Airline Fleet Turboprop routes have dropped 54 percent over the last decade (from 1429 routes to 651).

Turboprop Routes 1Q1995

Turboprop Routes 1Q2005

Short-haul markets have lost substantial service since 2001 The shortest bands drop at the highest rate due to availability of substitute products (car, bus, train, access to LCC by driving to alternative airport) The shortest bands drop at the highest rate due to availability of substitute products (car, bus, train, access to LCC by driving to alternative airport) Source: BACK / OAG Schedules Database

Regional Airline Service makes the hub and spoke system work Regional airlines are structured to work with network carriers to absorb risks from network reconfigurations Regional airlines are structured to work with network carriers to absorb risks from network reconfigurations 21% of domestic passengers travel in markets that produce less than 50 passengers per day* 21% of domestic passengers travel in markets that produce less than 50 passengers per day* Network carriers depend on these markets for 27 percent of their passengers* Network carriers depend on these markets for 27 percent of their passengers* Low fare airlines provide limited service to small communities – only 7% of their passengers and 10% of their revenue come from smaller markets.* Low fare airlines provide limited service to small communities – only 7% of their passengers and 10% of their revenue come from smaller markets.* The service provided by regional airlines is critical for the operational and financial success of the major airlines The service provided by regional airlines is critical for the operational and financial success of the major airlines *Source: “A Significant Co-Dependence” by Aaron Taylor, Eclat

Scope Clauses Create Inefficiencies Scope clause restrictions, which some airlines have been able to revise but not eliminate, should be reevaluated in the current economic climate Scope clause restrictions, which some airlines have been able to revise but not eliminate, should be reevaluated in the current economic climate Major and regional airlines must be able right-size aircraft to markets Major and regional airlines must be able right-size aircraft to markets Scope clauses fail to serve the long-term economic interests of the regional airlines, major airlines, or the pilots of both Scope clauses fail to serve the long-term economic interests of the regional airlines, major airlines, or the pilots of both It is simplistic to view scope only as a labor dispute when it continues to deprive communities of competitive alternatives and increased nonstop routes It is simplistic to view scope only as a labor dispute when it continues to deprive communities of competitive alternatives and increased nonstop routes In a deregulated environment, limitations on air service should not be acceptable to Congress or federal policymakers In a deregulated environment, limitations on air service should not be acceptable to Congress or federal policymakers

Regional Airline Growth and Success Regional airlines affected by major carriers finances Regional airlines affected by major carriers finances Regional airlines must maintain or reduce costs or will be priced out of the market Regional airlines must maintain or reduce costs or will be priced out of the market Majors have many choices for partners Majors have many choices for partners Lower ticket prices and yields have caused majors to reduce “fee per departure” contracts Lower ticket prices and yields have caused majors to reduce “fee per departure” contracts Regional carriers with “pro-rate fee” agreements seeing less income due to lower ticket prices Regional carriers with “pro-rate fee” agreements seeing less income due to lower ticket prices

Regional Airlines Have Reduced Costs in Response to Reduced Revenue Cost and Revenue Per ASM (cents) Source: DOT OIG

Taxes/Fees on a $200 Ticket* Have More Than Tripled 2004 Taxes = 26% ($52)* 1972 Taxes = 7% ($15)* 1992 Taxes = 15% ($29)* *Sample itinerary assumes one-stop domestic round-trip with maximum passenger facility charge (PFC) per airport; $200 total price includes taxes and fees. Source: ATA

Taxes and Fees Impact Service Airlines face pressure on fares and cannot pass increased fees to passengers Airlines face pressure on fares and cannot pass increased fees to passengers Average leisure fares down 10 percent in 2004 compared with 2003; business fares down 8 percent Average leisure fares down 10 percent in 2004 compared with 2003; business fares down 8 percent All airlines must absorb increased costs or could lose passengers to other airlines All airlines must absorb increased costs or could lose passengers to other airlines Passengers are even more price sensitive in short-haul markets Passengers are even more price sensitive in short-haul markets Regional airlines lose passengers to the road as the “fly- drive equation” changes and passengers drive to airports with lower fares Regional airlines lose passengers to the road as the “fly- drive equation” changes and passengers drive to airports with lower fares

Taxes and Fees Impact Service The aviation security fee in the President’s FY06 Budget Request would increase by 120 percent to $5.50, capped at $8 one-way and $16 round-trip The aviation security fee in the President’s FY06 Budget Request would increase by 120 percent to $5.50, capped at $8 one-way and $16 round-trip The new tax would bring the total federal security tax on airlines to $4.7 billion per year The new tax would bring the total federal security tax on airlines to $4.7 billion per year Passengers traveling on regional airlines would be disproportionately impacted because multiple flight segments mean more tax occurrences Passengers traveling on regional airlines would be disproportionately impacted because multiple flight segments mean more tax occurrences This fee increase would raise fares for travel to rural communities, will divert resources away from carriers serving rural markets, and makes this service even more expensive for carriers, putting air service to smaller communities at risk. This fee increase would raise fares for travel to rural communities, will divert resources away from carriers serving rural markets, and makes this service even more expensive for carriers, putting air service to smaller communities at risk.

Budget Cuts Impact Service AIP targeted for one of the largest reductions ($600 million) in the entire fiscal year 2006 budget request, despite a proven track record that enhances airport safety, capacity, and security AIP targeted for one of the largest reductions ($600 million) in the entire fiscal year 2006 budget request, despite a proven track record that enhances airport safety, capacity, and security Administration suggests airports should respond to cuts by imposing maximum PFCs as potential revenue source of $350 – 400 million per year Administration suggests airports should respond to cuts by imposing maximum PFCs as potential revenue source of $350 – 400 million per year As airport rates and fees increase, service becomes more expensive As airport rates and fees increase, service becomes more expensive

Essential Air Service EAS currently ensures commercial air service to 146 communities (36 of which are in Alaska) EAS currently ensures commercial air service to 146 communities (36 of which are in Alaska) Because of increasing costs and the continuing financial turndown in the aviation industry, about 37 communities have been forced into the EAS program since 9/11/2001 Because of increasing costs and the continuing financial turndown in the aviation industry, about 37 communities have been forced into the EAS program since 9/11/2001

Essential Air Service The FY06 Budget Request would severely cut and potentially dismantle the EAS program The FY06 Budget Request would severely cut and potentially dismantle the EAS program Funding for EAS would be cut by $52 million (1/3 of communities would be forced out) Funding for EAS would be cut by $52 million (1/3 of communities would be forced out) Cost-sharing criteria imposed on EAS communities based on hub airport distance Cost-sharing criteria imposed on EAS communities based on hub airport distance Communities within 100 miles to large hub airports, 75 miles to small-hub airports, or 50 miles to airports with jet service would lose commercial air service and receive only 50 percent of previous funding for surface transportation use only Communities within 100 miles to large hub airports, 75 miles to small-hub airports, or 50 miles to airports with jet service would lose commercial air service and receive only 50 percent of previous funding for surface transportation use only Communities less than 210 miles to a large or medium hub would receive a 25 percent cut funding cut (subject to fund availability) Communities less than 210 miles to a large or medium hub would receive a 25 percent cut funding cut (subject to fund availability) Communities more than 210 miles would experience a 10 percent funding cut (subject to fund availability) Communities more than 210 miles would experience a 10 percent funding cut (subject to fund availability)

Demand Management The FAA forecasts that traffic will exceed pre-2001 levels during the current fiscal year and will exceed 1 billion enplanements by The FAA forecasts that traffic will exceed pre-2001 levels during the current fiscal year and will exceed 1 billion enplanements by Peak-hour pricing systems are inconsistent with national goals to enhance air service competition throughout the United States Peak-hour pricing systems are inconsistent with national goals to enhance air service competition throughout the United States Regional passengers pay the same aviation taxes and fees as other travelers and should not face higher ticket prices or limited travel options because we failed to modernize and expand the airport and airway system Regional passengers pay the same aviation taxes and fees as other travelers and should not face higher ticket prices or limited travel options because we failed to modernize and expand the airport and airway system Congestion pricing limits service and fare choices of passengers in small or medium sized cities and is not an appropriate solution Congestion pricing limits service and fare choices of passengers in small or medium sized cities and is not an appropriate solution RAA favors federally-mediated voluntary negotiations to address capacity concerns, similar to those that were used effectively by the federal government for Chicago O’Hare. RAA favors federally-mediated voluntary negotiations to address capacity concerns, similar to those that were used effectively by the federal government for Chicago O’Hare.